State Of The Union: The Fight To Freeze Spending

If you're looking for a sneak peek at the budget battle ahead in 2011, tonight's State of the Union address--and the Republican response--should provide a pretty good one.

President Obama is expected to call for a five-year freeze in some discretionary spending. Reportedly, the freeze wouldn't affect security spending, which occupies about 23% of the FY2011 budget proposal. Nor would it affect Social Security, Medicare, Medicaid and other mandatory spending programs, which take up another 56% of the budget pie. In essence, the president is talking about freezing slightly more than 20% of federal spending.

After Obama speaks, you'll hear more talk about slashing government spending, when House Budget Committee Chairman Paul Ryan, R-Wisc., gives the GOP rebuttal. Ryan has his own plan to trim the $1.3 trillion federal budget deficit and national debt--and it would affect Medicare and Social Security--but don't expect him to pitch that specific proposal Tuesday night.

There are at least two issues here. First, Republicans and Democrats are in a face-off over roughly one-fifth of the entire budget--leaving the remaining 80% virtually untouched. However, there is a twist: The House on Wednesday directed Ryan, in his capacity as budget chairman, to set spending for the remainder of the year at FY2008 levels. But that brings up issue number two: gridlock.

Spending bills, like all legislation, have to be approved by both chambers of Congress before they move forward for the president's signature. No matter how drastic spending cuts might be in the House, if they're not approved by the Senate, they go nowhere. In addition, Obama wields a mighty veto pen.

Moroever, last year Congress couldn't pass a budget, leaving the stopgap funding mechanism for 2011 to expire in March (hence the need to determine how much to spend for the rest of the fiscal year). And despite the fact that the federal budget deficit is $1.3 trillion, the president's bipartisan "Fiscal Commission," of which Ryan was a member, couldn't muster enough support from within its own ranks to get Congress to vote on a deficit reduction plan.

In short, the prospects for agreement on what to do about that relatively small slice of the budget called non-security discretionary spending don't look good.

2. Corporate tax rate references. There's been some talk on Capitol Hill in recent weeks about lowering the U.S. corporate tax rate. It's nominally at 35%, among the highest in the world (though a slew of deductions makes it much lower for most companies). The president has talked repeatedly about making the U.S. more competitive. Business groups say that lowering the corporate tax rate is a good step to reaching this goal.

3. Movement on trade deals. Another theme that Obama has talked about in recent weeks (in fact, for much of the last year) is the need to increase U.S. exports. His administration has a goal of doubling exports beyond their 2010 levels by 2015. In December, the White House finalized a free trade agreement with South Korea, but it hasn't yet been sent to Congress for a vote. Two other pending trade deals--with Colombia and Panama--also await congressional approval. Will the president send them all to Congress at once? That's something a lot of businesses want to know.

4. What to do about "supplementals." Back to budget issues, to fund the wars in Afghanistan and Iraq, the government has passed "supplemental" military budgets. Last year, the requested amount for these wars was about $160 billion. If Congress does indeed reduce spending to 2008 levels, is supplemental funding included or not?